Tax-Dodging Microsoft Should Not Be Honored at SOTU

The Director of Windows Business Group Vineet Durani speaks during the launch of the Microsoft Surface Pro 4 tablet in the In
The Director of Windows Business Group Vineet Durani speaks during the launch of the Microsoft Surface Pro 4 tablet in the Indian capital New Delhi on January 7, 2016. AFP PHOTO / CHANDAN KHANNA / AFP / Chandan Khanna (Photo credit should read CHANDAN KHANNA/AFP/Getty Images)

Microsoft CEO Satya Nadella will be sitting in the House gallery as an honored guest at the State of the Union (SOTU) address tonight. By all rights, he be should sitting before a Congressional committee instead, answering for his company's blatant tax avoidance.

Microsoft is playing a game called "Global Tax Dodge." But don't look for it on the company's Xbox video system. It's only available to Microsoft's accountants and high-priced lawyers. Even though the rest of us can't play, we all foot the company's $34 billion price tag.

That's about the amount of tax revenue Microsoft is not paying because it has stashed $108 billion in profits offshore. As revealed in a Seattle Times report last month, Microsoft uses a web of overseas subsidiaries to dodge U.S. taxes, knocking its tax rate down to a minuscule 4.5 per cent on its offshore profits. That's lower than most working families pay.

The money you fork over for that Xbox or Office suite at the local mall takes a circuitous route to Microsoft's bottom line, stopping in tax havens (Bermuda twice) just long enough to shake off tax liability.

Microsoft began building this tax avoidance maze more than 20 years ago when it shifted software royalty rights to a dummy corporation in Nevada to avoid a levy in its home state of Washington. That first domestic dodge eventually grew into the company's current system of tax avoidance based in tax havens around the world.

Microsoft is one of the biggest offshore tax dodgers, but a handful of other huge companies play the same game. American corporations have more than $2 trillion in untaxed earnings packed away overseas. Altogether, they owe us some $600 billion.

Imagine the items we could check off our list of public needs if we collected all those unpaid corporate taxes: shortening commutes by improving highways and transit systems; easing overcrowding in schools; finding the next big medical cure.

President Obama may well outline plans to address some of those public challenges in his SOTU speech. The audience, including the Congressional leadership and Microsoft CEO Nadella, will doubtless applaud.

But if Nadella really wanted to show his support, he'd stop his company's tax dodging. And Congressional leaders would make true corporate tax reform a priority, forcing big corporations to finally start paying their fair share.

Unfortunately, most tax reform talk these days focuses on the supposed need to lower America's official corporate tax rate of 35 per cent. But as the example of Microsoft proves, that rate is easily sidestepped. Numerous studies have found that, after all their deductions, credits and other breaks, corporations actually pay only about half the official rate. And all those profits stashed offshore have only been taxed at 6 per cent, because they are mostly in tax havens. A huge loophole lets U.S. corporations avoid income taxes on those profits until they are brought home--which may never happen.

Some companies zero out their tax obligation altogether. Boeing, General Electric and are among two dozen profitable U.S. firms that went five years without paying a nickel in federal income taxes, according to Citizens for Tax Justice.

And yet big corporations like Microsoft still want more. They are fighting for legislation in Congress that would exempt all of their offshore profits from any U.S. taxes. Known as a territorial tax system, this will create even more incentives to shift profits--and jobs -offshore. Instead, U.S. corporations should pay the same tax rate on profits no matter where they are earned.

If Nadella ever does take that seat at a committee witness table, he'd be following the Microsoft tax executive who testified about the company's offshore tax dodging before the Senate Subcommittee on Investigations three years ago. That panel outlined Microsoft's offshore tax dodging maze back in 2012; the recent newspaper report added important details, but the basic structure was already known.

The Subcommittee, using Microsoft as Exhibit 1 of corporate tax abuse, called for real reforms. But nothing happened because corporate lobbyists control the agenda. Reform that makes corporations pay their fair share might get a needed boost if President Obama endorsed it in his speech--even if one of the invited guests doesn't clap.

Frank Clemente is executive director of Americans for Tax Fairness.